# Application-Layer Mechanism Design Eliminates AMM MEV for Provably Fair DeFi ∞ Research

**Published:** 2025-10-20
**Categories:** Research

---

![A detailed close-up reveals a complex mechanical assembly, predominantly in vibrant blue and metallic silver, featuring an array of gears, shafts, and interconnected components against a clean white background. The intricate design highlights precision engineering, with various modules and conduits suggesting a sophisticated operational system](https://incrypthos.com/wp-content/uploads/2025/09/modular-cryptographic-engine-hardware-for-decentralized-network-consensus.jpeg)

![A sophisticated, modular blue and silver mechanism is depicted, densely enveloped by countless small, translucent spherical particles that appear to be in motion. The central structure features prominent hexagonal elements and a sleek, industrial design, with a stream of particles entering and exiting various components](https://incrypthos.com/wp-content/uploads/2025/09/Enterprise-Blockchain-Scalability-Mechanism-Processing-Tokenized-Value.jpeg)

## Briefing

The core research problem is the systemic centralization and instability caused by Maximal Extractable Value (MEV) extraction in Automated Market Makers (AMMs), which is fundamentally enabled by the block producer’s control over transaction ordering. This paper proposes a foundational breakthrough by shifting the solution from the consensus layer to the application layer, introducing a novel AMM mechanism that processes all transactions within a block in a single, batched execution that maintains a [constant potential function](https://incrypthos.com/news/constant-potential-function/). The single most important implication is the creation of a new paradigm for DeFi, where application-layer mechanism design can provably ensure strategy-proofness and arbitrage resilience, complementing and leveraging the guarantees of underlying consensus protocols.

![A sophisticated mechanism, composed of polished metallic and crystalline blue elements, is depicted amidst dynamic splashes of clear water. The scene highlights the interaction between precision engineering and fluid dynamics, suggesting a high-performance system](https://incrypthos.com/wp-content/uploads/2025/09/Cryptographic-Hashing-Engine-Enterprise-Blockchain-Resilience-Protocol.jpeg)

## Context

Before this work, the prevailing theoretical challenge was the perceived impossibility of fully solving the general MEV problem solely at the [consensus layer](https://incrypthos.com/news/consensus-layer/), given the inherent power of the block producer to control transaction inclusion and ordering. This limitation led to a highly centralized off-chain economy where block producers could auction off favorable positions, causing the decentralized infrastructure to operate in a manner that significantly departed from its intended, trustless equilibrium.

![A white and blue football, appearing textured with snow or ice, is partially submerged in deep blue, rippling water. Visible are its distinct geometric panels, some frosted white and others glossy blue, linked by metallic silver lines](https://incrypthos.com/wp-content/uploads/2025/09/defi-yield-protocol-cold-storage-immersion-resilience.jpeg)

## Analysis

The paper’s core mechanism is a smart contract-level swap function that operates on all transactions in a block as a single, indivisible batch. This batch-processing approach enforces a pre-defined rule, such as maintaining the constant-product invariant, after all trades are executed, effectively eliminating the temporal advantage needed for front-running and back-running within the block. This design fundamentally differs from previous approaches by ensuring arbitrage resilience ∞ meaning a block producer cannot gain risk-free profit even with full control over the block ∞ and by proving [incentive compatibility](https://incrypthos.com/news/incentive-compatibility/) when combined with a consensus layer that provides sequencing fairness.

![The image displays a high-tech abstract mechanism composed of transparent blue tubes intricately intertwined with metallic cylindrical structures. These components are arranged against a gradient grey background, suggesting depth and a futuristic environment](https://incrypthos.com/wp-content/uploads/2025/09/Decentralized-Ledger-Mechanism-Crypto-Liquidity-Smart-Contract-Flow.jpeg)

## Parameters

- **[Arbitrage Resilience](https://incrypthos.com/news/arbitrage-resilience/)** ∞ Miner cannot gain risk-free profit even with full control over block contents and sequencing.

- **Incentive Compatibility** ∞ Any individual user’s best response is to follow the honest strategy when [sequencing fairness](https://incrypthos.com/news/sequencing-fairness/) is present.

- **Batch Execution** ∞ All transactions within a block are processed together to maintain a constant potential function.

![The image showcases a vibrant blue, textured structure, intricately intertwined with multiple circuit boards and connecting wires, partially framed by a metallic ring. The blue elements appear wet or crystalline, suggesting fluid movement, while the embedded modules are distinct in color and form](https://incrypthos.com/wp-content/uploads/2025/09/blockchain-protocol-computational-modules-dlt-network-architecture.jpeg)

## Outlook

This theoretical framework opens a new avenue for designing provably secure and fair decentralized applications, moving beyond heuristic [MEV mitigation](https://incrypthos.com/news/mev-mitigation/) to mathematically guaranteed strategy-proofness. In the next three to five years, this research will likely lead to the deployment of new-generation AMMs and other DeFi primitives that are fundamentally immune to ordering-based MEV, enabling a more stable and equitable on-chain financial architecture by aligning application incentives with protocol security.

![A close-up shot captures sleek silver and dark grey metallic components partially submerged in a vivid blue, bubbling liquid. The liquid's surface is covered with a dense layer of white foam and numerous small bubbles, suggesting active agitation around the precise, angular structures](https://incrypthos.com/wp-content/uploads/2025/09/Decentralized-Ledger-Transaction-Validation-Mechanism-and-Protocol-Liquidity-Dynamics.jpeg)

## Verdict

**This research establishes a new foundational principle that application-layer mechanism design is a necessary and sufficient complement to consensus protocols for achieving provable economic security in [decentralized finance](https://incrypthos.com/news/decentralized-finance/).**

Automated Market Maker, MEV Mitigation, Mechanism Design, Arbitrage Resilience, Incentive Compatibility, Application Layer, Smart Contract Mechanism, Sequencing Fairness, Batch Processing, Decentralized Finance, Strategy Proofness, Constant Potential Function, Transaction Ordering, Block Producer Control, Decentralized Exchange Signal Acquired from ∞ <a href="https://arxiv.org/abs/2402.09357?utm_source=incrypthos.com&utm_medium=referral&utm_campaign=noo-engine.com" target="_blank" rel="nofollow">arxiv.org</a> 

## Micro Crypto News Feeds

<a href="https://incrypthos.com/news/constant-potential-function/" class="glossary-item-box">

## constant potential function 

Definition ∞ A constant potential function is a mathematical construct utilized in automated market makers (AMMs) and decentralized exchanges (DEXs) to maintain a specific invariant across liquidity pools. </a><a href="https://incrypthos.com/news/consensus-layer/" class="glossary-item-box">

## consensus layer 

Definition ∞ The Consensus Layer is the foundational component of a blockchain network responsible for coordinating and validating transactions across all participating nodes. </a><a href="https://incrypthos.com/news/incentive-compatibility/" class="glossary-item-box">

## incentive compatibility 

Definition ∞ Incentive Compatibility describes a system design where participants are motivated to act truthfully and in accordance with the system's rules, even if they could potentially gain by misbehaving. </a><a href="https://incrypthos.com/news/arbitrage-resilience/" class="glossary-item-box">

## arbitrage resilience 

Definition ∞ Arbitrage resilience refers to a system's capacity to withstand and maintain stability amidst opportunistic price discrepancies across different markets. </a><a href="https://incrypthos.com/news/sequencing-fairness/" class="glossary-item-box">

## sequencing fairness 

Definition ∞ Sequencing fairness pertains to the impartial ordering of transactions or operations within a decentralized system, particularly in blockchain networks. </a><a href="https://incrypthos.com/news/mev-mitigation/" class="glossary-item-box">

## mev mitigation 

Definition ∞ MEV mitigation refers to strategies and techniques designed to reduce or neutralize the impact of Miner Extractable Value (MEV). </a><a href="https://incrypthos.com/news/decentralized-finance/" class="glossary-item-box">

## decentralized finance 

Definition ∞ Decentralized finance, often abbreviated as DeFi, is a system of financial services built on blockchain technology that operates without central intermediaries. </a>

**Tags:** [Mechanism Design](https://incrypthos.com/news/mechanism-design/), [Automated Market Maker](https://incrypthos.com/news/automated-market-maker/), [Constant Potential Function](https://incrypthos.com/news/constant-potential-function/), [Incentive Compatibility](https://incrypthos.com/news/incentive-compatibility/), [Decentralized Finance](https://incrypthos.com/news/decentralized-finance/), [Arbitrage Resilience](https://incrypthos.com/news/arbitrage-resilience/)	

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**Tags:** [Application Layer](https://incrypthos.com/news/application-layer/), [Arbitrage Resilience](https://incrypthos.com/news/arbitrage-resilience/), [Automated Market Maker](https://incrypthos.com/news/automated-market-maker/), [Batch Processing](https://incrypthos.com/news/batch-processing/), [Block Producer Control](https://incrypthos.com/news/block-producer-control/), [Constant Potential Function](https://incrypthos.com/news/constant-potential-function/), [Decentralized Exchange](https://incrypthos.com/news/decentralized-exchange/), [Decentralized Finance](https://incrypthos.com/news/decentralized-finance/), [Incentive Compatibility](https://incrypthos.com/news/incentive-compatibility/), [Mechanism Design](https://incrypthos.com/news/mechanism-design/), [MEV Mitigation](https://incrypthos.com/news/mev-mitigation/), [Sequencing Fairness](https://incrypthos.com/news/sequencing-fairness/), [Smart Contract Mechanism](https://incrypthos.com/news/smart-contract-mechanism/), [Strategy Proofness](https://incrypthos.com/news/strategy-proofness/), [Transaction Ordering](https://incrypthos.com/news/transaction-ordering/)

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**Original URL:** https://incrypthos.com/research/application-layer-mechanism-design-eliminates-amm-mev-for-provably-fair-defi/
